Staked Ether (stETH)

What is Staked Ether?

Staked ether (stETH) refers to a cryptocurrency token representing one unit of ether (ETH) that has been "staked" or deposited and locked up in support of Ethereum's upgraded network called the beacon chain. Staked ether functions somewhat like an IOU, in that stETH holders should be able to redeem staked ether tokens for an equivalent number of ether tokens following a waiting period. In this case, the waiting period will last until after Ethereum's new network standard, Ethereum 2.0, is adopted.

In spring 2022, staked ether became a focal point as the cryptocurrency market experienced significant turbulence, with many of the leading tokens shedding a significant portion of their value. One reason for staked ether's role in this chaos is that the price of stETH fell below that of ether, although the two are supposed to trade at the same value. This has prompted concerns about a market crash and ongoing crypto liquidity crisis. As of June 23, 2022, Lido Finance's stETH tokens traded at $1,090.67 as compared with $1,143.39 for ETH tokens, representing about 95.3% of the value of ether.

Key Takeaways

  • Staked ether, or stETH, is a derivative cryptocurrency token that represents an equivalent token of ether that has been staked.
  • Staked tokens are locked up for an extended period to support and secure a blockchain network.
  • In the case of stETH, ether tokens are staked until a period after the Ethereum network upgrade known as Ethereum 2.0.
  • In spring 2022, stETH and ETH values diverged, with stETH trading at a discount.
  • The decoupling has prompted concerns about the stability of Ethereum, liquidity for ETH holders, and the broader health of the crypto industry.

Understanding Staked Ether

To understand staked ether, it's important first to understand the concept of "staking" cryptocurrency tokens. Staking requires that cryptocurrency holders lock up tokens over a period of time in order to support the crypto network's security and to validate blocks in the network blockchain. These investors receive rewards for this practice through a process known as proof of stake (PoS).

The Ethereum 2.0 network upgrade will utilize a proof-of-stake mechanism. Current ether holders can stake a minimum of 32 ETH in exchange for a competitive annual percentage rate reward. However, these tokens must be staked for a period of months or even years and will only be eligible for redemption after a period following the upgrade. The upgrade has already been delayed, and it is not clear when it will be complete.

The 32 ETH minimum required to stake for the Ethereum 2.0 upgrade is well beyond the holdings of most ether investors. Still, outside platforms such as Lido Finance have made it possible for users to stake smaller quantities of ETH. Lido has allowed users to put up any amount of ether for staking in exchange for the stETH derivative token. It is similar to a lending or insurance product in traditional banking. StETH tokens allow users to continue to trade and lend their cryptocurrency holdings even as their ETH tokens are staked.

Staked Ether's Decoupling From Ether

As mentioned, the value of staked ether recently decoupled from the value of ETH. StETH is currently trading at a discount relative to ETH. Lido Finance and other similar platforms have amassed hundreds of millions of dollars worth of stETH deposits. Users holding stETH may feel increasing pressure to dump their derivative tokens in case the value gap widens. However, the liquidity pool allowing for the transfer between stETH and ETH is significantly unbalanced, according to reports. This means that there is not enough ETH to meet every potential stETH withdrawal.

Additionally, the ongoing issues with staked ether bring up concerns about Ethereum's security more broadly. Lido accounts for roughly one-third of all ether staked to the Ethereum 2.0 beacon chain, meaning that Lido holds significant power over the soon-to-be-upgraded network. The potential implications for this are not entirely clear, but they call to mind a similar concern in proof-of-work networks called a 51% attack, in which a group of miners controls the majority of the network's computing power and then takes control over transactions.

Another cryptocurrency lender, Celsius, has also played a role in the stETH decoupling. Celsius halted account withdrawals when the decoupling began. With more than $400 million in stETH deposits, Celsius may have to try to sell its stETH, which would put further downward pressure on the value of stETH.

Broader Concerns About Staked Ether

As stETH and ETH have seen prices diverge, crypto investors have compared this decoupling to the recent breaking of values between the stablecoin TerraUSD (UST) and the U.S. dollar. TerraUSD, a so-called algorithmic stablecoin that was designed to be pegged to the U.S. dollar, collapsed following a bank run earlier in 2022.

However, some analysts have suggested that the stETH/ETH decoupling is different. StETH is not a stablecoin, meaning that it does not need to trade at a 1:1 ratio to ETH in order to function properly. The immediate risk of a bank run is also contained because the Ethereum network has not enabled withdrawals from staking at this point.

What Is Ethereum?

Ethereum is a decentralized global software platform powered by blockchain technology. The network is known for its native cryptocurrency, called ether, or ETH. Ethereum can be used by anyone to create any type of secured digital technology. The Ethereum network natively supports smart contracts, which are the essential tool behind decentralized applications.

How Does the Proof-of-Stake (PoS) Process Work?

Proof of stake (PoS) is a cryptocurrency consensus mechanism for processing transactions and creating new blocks in a blockchain. In contrast with a proof-of-work (PoW) system, proof-of-stake changes the way that blocks are verified using the machines of coin owners. The owners offer their coins as collateral for the chance to validate blocks. Coin owners with staked coins become "validators."

What Are the Effects of the Decoupling Between Ether and Staked Ether?

The decoupling has prompted concerns about the stability of the Ethereum network, liquidity for ether holders, and the broader health of the cryptocurrency industry. However, the immediate risk of a bank run is contained because the Ethereum network has not enabled withdrawals from staking.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Lido. "How Lido Works."

  2. CoinDesk. "'Staked Ether' Becomes Focus of Crypto Stress, From Celsius to Three Arrows."

  3. CoinMarketCap. "Ethereum: Historical Data."

  4. CoinMarketCap. "Lido Staked ETH: Historical Data."

  5. ethereum.org. "How to Stake Your ETH."

  6. ethereum.org. "Proof-of-Stake (PoS)."

  7. CoinDesk. "Ethereum Merge No Longer Expected in June."

  8. Lido. "Introducing Lido."

  9. CoinDesk. "The Fall of Terra: A Timeline of the Meteoric Rise and Crash of UST and LUNA."

  10. CoinDesk. "Decoupling of Lido’s Staked ETH Differs From Stablecoin Collapse, CoinShares Says."

  11. ethereum.org. "Intro to Ethereum."

Take the Next Step to Invest
×
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Service
Name
Description